Start the conversation
CNBC stock picker Jim Cramer calls it a "Great Gatsby market," the growing divide between the rich and the rest of us.
And you can profit from it – by buying stocks of retailers that cater to the rich.
That's because these luxury retailers don't feel the pinch of economic hardships among their rich customer base nearly as much as lower-end retailers do.
Cramer says the rich can afford to buy expensive items, while much of the rest of the population struggles to get by and has less discretionary income now, partly because of the recent increase in the payroll tax and soaring gas prices.
"This is a Great Gatsby market; the rich are not like us," Cramer says.
Even if the stock market slows this year, analysts don't expect that to reduce spending among shoppers at high-end retail stores.
The Great Income Divide
A look at income statistics helps explain why.
Families in the top 1% of incomes earned an average of over $367,000 in 2011, certainly more than enough to weather the end of the 2% payroll tax holiday and the recent surge in gas prices.
And unlike the other 99%, the top earners have seen their incomes rise in the past few years. That's partly because they have more investment income than ordinary income and have been able to take advantage of the rising stock market.
The incomes of the top 1% of earners grew an average of 11.2% from 2009-2011, while the bottom 99% fell an average of 0.4% during the same period, according to Emmanuel Saez, an economist at the University of California-Berkeley. The top 1% accounted for 121% of the income gains during the first two years of the recovery from the Great Recession.
When 2012 income figures are released, Saez expects them to show even more growth for top earners.
"In 2012, [the] top 1% income will likely surge, due to booming stock prices, as well as re-timing of income to avoid the higher 2013 top tax rates," Saez wrote.
Retail Stocks to Buy to Play the "Great Gatsby Market"
While retailers geared to lower-income consumers such as Wal-Mart Stores Inc. (NYSE: WMT) and Dollar General Corp. (NYSE: DG) have reported weaker sales and earnings recently at a time of higher taxes, rising gas prices and low consumer confidence, most luxury retailers have performed well.
Wall Street veteran David Shines thinks apparel designer and distributor Michael Kors Holding Ltd. (NYSE: KORS) is one of the best luxury retail stocks to own. Its third-quarter earnings, reported Feb. 12, came in at 61 cents per share, well ahead of Wall Street's 41-cent estimate. The stock is up more than 17% on the year.
High-end apparel maker V.F. Corp. (NYSE: VFC), whose brands include The North Face and Nautica, has also had a good start to 2013, up 6.5%. Plus, VFC pays a small dividend of 2.17%, which is still better than the yield on a 10-year treasury bond.
Another retailer to consider is Coach Inc. (NYSE: COH).
Even though Coach took a 16.5% hit after it announced earnings last month, Cramer says it's the luxury retailer stock to own because the stock is poised to gain following its precipitous drop after a poor December.
That decline has pushed Coach's dividend yield over 2.5% and now might be the best chance to purchase this luxury retailer at such a bargain.
Related Articles and News:
- Money Morning:
Can Retail Stocks Survive the Death of the Shopping Mall?
- Money Morning:
The Weakest Holiday Sales Growth Since 2008 Means It's Time to Short These Retailers
Cramer: This Is a 'Great Gatsby' Market
Striking it Richer: The Evolution of Top Incomes in the United States
- The New York Times:
Incomes Flat in Recovery, but Not for the 1%